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Diamonds: A cocktail of optimism, pessimism in the midst of Covid-19 pandemic

10 august 2020

excl_10082020_vv.pngRough & Polished’s Mathew Nyaungwa recently attended a webinar organised by CIBJO Communications to examine consumer demand at the time of the Covid-19 pandemic, importance of data, financial models and lab grown diamonds.

The webinar, chaired by Edward Johnson of CIBJO, was graced by industry analysts namely Paul Zimnisky, Pranay Narvekar, Edahn Golan and Russel Shor who participated as panelists.

Although Covid-19 has had a devastating impact on the diamond industry, its long-term impact is, however, yet to be ascertained, said Johnson as he set the ball rolling.

Below, we highlight comments made by the panelists.

 

Impact of Covid-19 on diamond industry – Edahn Golan

The entire diamond industry rests on the shoulders of retail and with the shutdowns, lockdowns and social distancing, retail in all industries suffered a serious blow and the diamond industry wasn’t immune to that. The results of that is we are sitting on a certain inventory, they had no need to pull on anything from wholesalers, and they didn’t need manufactures as they were sitting on a pile of inventory and that worked all the way up the pipeline. Some of them are sitting on a stockpile of a billion dollars’ worth of goods. So, we are looking at an industry that is waiting patiently for consumers to return to store and renew their purchasing. The outlook is that it will start at a haphazard and slow pace until November or December. In the meantime, cashflow is slow, the ability to pay employees is limited and that presents a host of issues to everybody in the pipeline.

 

Comparing Covid-19 crisis with previous crises – Russel Shor

The industry was already in severe contraction even before this crisis. If you go back to 15 years, Bain & Company was predicting this kind of supply gap that was going to push prices up and demand from China. I think a lot of mining companies used that model to develop new mines like Snap Lake and Victor Diamond Mine that are not viable now. So you had these operations going when rough prices had declined and again this is all before this Covid-19 crisis. So you had an industry with real problems and the Covid-19 crisis has created an inventory all the way up the pipeline and the bank financing, which was severely cut back to a little more half of what it was a few years ago. I don’t see retail holding it up very quickly so I think we are going to have a long haul uphill. Encouragingly, the retail in the US has not been that bad. Independent jewelers have been doing okay and this is from a couple of surveys...So you had the high jewelers doing well and you had people catering to the fashion and lower ends of $1000 who were growing and the middle market people were relatively stagnant.

 

Challenges in the pipeline during Covid-19 – Paul Zimnisky

Apart from the physical closure of jewellery stores throughout the world, this industry is global in nature, the supply chain is quite large. There has been a significant amount of supply curtailment and closures in the industry this year. Global rough supply this year will be the lowest since the 1990s.

 

How the Indian diamond industry dealt with the pandemic – Pranay Narvekar

What we saw in the Covid-19 crisis is that all of a sudden there was a shutdown across the world from retail to manufacturing and some mine closures as well. Our industry is pretty much one pipeline so if you have a fair idea of what happens at the retail end you can then extrapolate it back into what is going to happen in the polishing industry and back into the rough. That being said, I think from a business perspective, it was all about managing your liquidity and manage your whole business. We recommended a three-month moratorium on purchasing of rough and [that came to an end on 31 July]. The idea is that the industry had beefed up over the first quarter. The current cycle essentially started in November where the industry started stocking up looking for a good 2020, however when Covid-19 struck, the industry had already stocked a good amount of rough. That had to be liquidated and by doing that liquidation the liquidity pressure has also eased on the industry. The moratorium was done on a monthly basis. We look forward to the next step.

 

Next step – Pranay Narvekar

My personal opinion is that another month should not make any difference because the industry in August is usually slow. In a normal case we have holidays in Belgium and other places, however, people will start seeing some movement in polished. They would like to get ready for the season, so it could go either way.

 

Demand for diamond jewellery in the past after crisis – Edahn Golan

Demand for diamond jewellery bounces back quickly whenever there is a crisis, this is spurred mainly by bridal purchases. The social background to that is people feel that they are under threat and that they should take life seriously and move forward, not delay expressing love, not delay a proposal and weddings. That spurs a lot of business activities. Very quickly we see the bigger ticket items, the average price of an engagement ring in $3200-3500 in the US. So the diamond industry has a lot to look forward to …if the industry will generate marketing material that fits the times and that is original and addresses the correct population, those that can and will spend and actually deploy it on time we should expect to see very good sales. Of course there are a lot of caveats to that, for example recent studies show that people are worried about going into malls, about 75% of Americans said they are okay about walking into a small shop and 50% of adult Americans say they are concerned about visiting the malls, [yet] there is a lot of diamond business happening at the malls. This is something that we need to take into account.

 

Love not quarantined - Edward Johnson

Johnson said that he was reminded of what one jeweler from Jack Lewis Jewelers said at one of their webinars at the end of April. John Carter, the jeweler, said love is not quarantined as he was still seeing people who were wanting to celebrate relationships despite the lockdown. Golan also said the same happened in Japan during the March 2013 triple disaster. In March that year imports of polished diamonds reached a record high. So about 250 000 families were still displaced without houses, but they realised already that avoiding a proposal was [not good], if you know that there is someone that you love don’t wait, life is very short. So those kinds of events are a reminder that life is very short and true love is not quarantined. That is the main roadmap out of this crisis for the jewellery industry – celebrating life’s special moments, which is what jewellery does, added Johnson.

 

Lab grown diamonds – Russel Shor

I think the train has left the station on real is rare campaign... We have to do a lot more than competing with lab grown diamonds or celebrating special occasions. We need to stress out how diamonds connect us to the earth and I think that message reaches people of all ages, and that can easily be transmitted through all social media, but we have to do much more than compete against lab grown diamonds. We should also wove in the issue of sustainability when promoting natural diamonds. A number of American consumers do take sustainability into account when making certain purchases…, it’s a huge issue with a lot of people who are buying diamond jewellery.

 

Marketing natural diamonds – Edahn Golan

We need a slogan that talks about the emotional value of diamonds and buying diamond jewellery, in that regard if we succeed in creating a conversation around diamond jewellery and purchase that centres around the idea of emotion, especially if we are talking about love, etc., then we will be doing a step in the right direction. So the diamond industry has to take care of the diamond industry, but governments have to take care of their economies and we need both of them to make things happen.

 

Diamond sales - Pranay Narvekar

It has been projected that there will be up to 35% drop in luxury spending this year. If we take the historical pattern we have been doing worse than the luxury industry. Our sales should be lower. That said, however, we have a lot of things going on in our favor. The first is that one of the biggest competitors to our share of wallet was the tourism industry that is currently not functional due to global travel restrictions. Yes it will eventually comeback but until that point we have a golden opportunity at improving our share as an industry. The other thing is of course is the emotional aspect. It’s a good time when people are afraid…so this a good opportunity for the industry to make the best out of it.

 

Diamond industry consumer driven – Paul Zimnisky

I guess it’s now more than ever before, we have seen a number of mines closed in recent years due to lack of profitability, you know these are mostly independents. But De Beers did close Snap Lake a few years back, so these are not situations where you keep producing and hope to sell diamonds at some point in the future. Economic diamond deposits are quite rare and they are a few and far between.

 

Data driven industry – Edahn Golan

Every modern business needs to be able to look at information in a dispassionate way…all successful companies look closely at analytics to grow their businesses. One of the biggest problems of the diamond industry is that it relies on very traditional attitude that is ‘am doing business the way my grandfather and father did, I talk with my buyers, I talk with my clients and I know what I need to provide them’’…The ability to use business analytics, accurate data, big data, gives a lot of business tools to improve their abilities to compete in the market, have accurate pricing and provide what consumers really want…

 

Diamond industry financing during the pandemic

Paul Zimnisky

Financing to the mid-stream segment, in particular, has obviously had been a challenge for the industry, what I would say is that there has been a significant deleveraging in that segment of the industry in the last couple of years and I think if you look at the mid-stream industry and the financing to that industry it’s now a lot more sustainable than it was going into this pandemic. Right now I don’t really see financing as a top problem for this industry, if anything interest rates around the world are pretty much at record lows, the world is awash in liquidity.

Russel Shor

The bank financing was always a key to a quick recovery of the industry. If you look at 2008 and 2009, the industry came back pretty quickly from that because banks where generous, or one might say overly generous and that helped fuel recovery. We don’t have that cushion now.

Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished